Western Oil Sands Inc.

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Western Oil Sands Inc.

Suite 2400, Ernst & Young Tower
440 2nd Avenue SW
Calgary, Alberta T2P 5E9
Canada
Telephone: (403) 233-1700
Fax: (403) 296-0122
Web site: http://www.westernoilsands.com

Public Company
Incorporated: 1999
Employees: 31
Sales: $780.7 million (2005)
Stock Exchanges: Toronto
Ticker Symbol: WTO
NAIC: 211111 Crude Petroleum and Natural Gas Extraction

Western Oil Sands Inc. is a Calgary, Canada-based company providing operational expertise to the Athabasca Oil Sands Project, a joint venture with Shell Canada Limited and Chevron Canada Limited. Western Oil Sands holds a 20 percent stake in the venture, which produces synthetic oil from the bitumen found in the oil sands deposits, about 30,000 square miles in size, in Canada's Alberta province. In addition to bitumen, oil sands are comprised of sand, mineral rich clays, and "envelopes" of water that serve to separate the sand from the bitumen. Almost two tons of oil sands have to be mined in order to produce one barrel of light, sweet synthetic crude oil. The Athabasca deposits are either mined or extracted using an in situ method, which involves the injection of high pressure steam into the oil sands formation. The bitumen is heated and then pumped to the surface along with steam and water. No matter how the bitumen is procured it is then combined with a diluent, usually natural gas condensate, and transported by pipeline to an upgrading facility where it is converted into a synthetic crude that conventional oil refineries can process further.

Turning oil sands into petroleum products has been a longtime endeavor in the energy industry, but only with advances in technology that have been brought to bear on the Athabasca deposits, along with high oil and gas prices, has it become commercially attractive. The allure of the Athabasca Oil Sands project is obvious, given the potential of the deposits. All told, the oil sands associated with Lake Athabasca are estimated to hold more than 300 billion barrels of recoverable oil, or nearly one-third of the world's proven oil reserves.

DISCOVERY OF OIL SANDS: EARLY 18TH CENTURY

Canada's oil sands first came to the attention of Europeans in 1719 when a Cree native brought samples of it to a Hudson Bay trading post. Not until 1875 did the Geological Survey of Canada begin investigating the oil sands, however, and by 1883 the organization first began attempts to use water to separate bitumen from the oil sands. Because oil was inexpensive to produce and there was yet no method to upgrade the bitumen into synthetic oil, other uses were sought for the oil sands in the early decades of the 1900s, such as a road-surfacing material. A hot-water separation plant was opened in the Athabasca area in 1925 by businessman Robert Fitzsimmons, who five years later began selling bitumen for paving as well as roof tar and fence post dip. The potential for turning the bitumen into oil, though, was not overlooked. In 1949 the Province of Alberta assumed control of the area, forming the Oil Sands Project, and four years later The Great Canadian Oil Sands consortium was formed with major oil companies, including the United States' Sun Oil Co. The consortium, which later changed its name to Suncor Energy Inc., opened an upgrading plant in 1964. In that same year another company became involved in the oil sands business, Syncrude Canada Ltd.

Commercial production of crude oil from the oil sands first took place in 1967 at the Suncor plant, while the Syncrude facility began production in 1978. Several in situ projects launched in the mid-1980s boosted production, which grew at an annual rate of 11.5 percent between 1980 and 1988. Yet production fell off to just 2.7 percent over the next six years. Oil companies were still intrigued by the potential of the oil sands, but production costs remained too high and oil prices too low to warrant much of an investment. In 1993 the Alberta Chamber of Resources formed the National Task Force on Oil Sands Strategies, comprised of government and industry officials. Two years later they made recommendations to the provincial and national governments to encourage investment in the oil sands. The end result was a new royalty system that attracted private sector companies to participate in the oil sands.

SHELL CANADA EXPLORES LONG-HELD LEASE: 1996

While Syncrude and Suncor expanded their operations, other players entered the field. Shell Canada, which had held a lease in the oil sands since 1954, finally took steps to develop the resource in 1996 when it launched a $25 million pre-feasibility study. A major Australian mining company, Broken Hill Proprietary Company Limited (BHP), was brought in as a 25 percent joint venture partner. After the completion of the prefeasibility study, the partners agreed that the project was worth pursuing. A feasibility study was begun, but in 1998 BHP endured some financial setbacks and decided to drop out of the project once the study was completed in 1999 in order to concentrate on its core business in Australia. Thus, when the work was done BHP laid off the 25 employees it had assigned to the project in Calgary. Led by five senior executives the group decided to form its own company to remain involved in the oil sands project. Able to raise just CAD 15 million between them for a project that was likely to require billions, they hired TD Securities to help recruit a seasoned chief executive who possessed credibility with potential investors. TD recommended that they meet with Guy Turcotte. Impressed by the former BHP team, Turcotte signed on as CEO and in short order secured commitments for CAD 400 million in equity capital and a CAD 535 million credit line, the result of just eight phone calls.

The new venture, Western Oil Sands Inc., was incorporated in June 1999 and two months later joined Shell Canada, which after considering potential replacements for BHP settled on Western Oil Sands. The new company then acquired a 20 percent stake in the Athabasca Oil Sands Project. In addition, Chevron Canada was brought in as a 20 percent partner to contribute its expertise in upgrading facilities and knowledge of refining.

Turcotte grew up on a farm in central Alberta and left home to study chemical engineering. When his interests changed to business, he earned an M.B.A. from the University of Alberta and then in 1976 became a project officer at the federal Business Development Bank. Turcotte was quick to spot a business opportunity, bringing in some partners to buy one of the bank's customers, a struggling woodworking company. Less than two years later he sold the business, pocketing $50,000, money he doubled in the stock market within a year. The Alberta oil industry was enjoying a boom around 1980, and seeing that a large number of fly-by-night companies were able to raise millions of dollars, he decided to get involved. "I thought," Turcotte told Canadian Business, "if they could do it, an honest guy like me should be able to do it, too." Conditions changed, however, when Turcotte began shopping his prospectus in 1981, as the boom faded and interest rates skyrocketed. Needing to raise $2 million in just three months in order to gain a listing on the Alberta Stock Exchange, Turcotte called on some 500 people to scrape together the money from 173 shareholders, forming Chauvco Resources.

COMPANY PERSPECTIVES

Our Vision—To create shareholder value through opportunity capture and development of large, world-class hydrocarbon resources.

Turcotte proved adept at forming joint ventures with major oil companies, taking advantage of low-risk plays in the Alberta area. He then began acquiring producing assets to build Chauvco further. By 1997 the company itself became an attractive acquisition. Fearful that the major shareholders were entertaining offers and he would lose control, Turcotte put Chauvco on the block in a preemptive move to maximize shareholder value. Dallas-based Pioneer Natural Resources Co. bought the company in September 1997 for CAD 1.3 billion, well above the price of its stock. Not only did he walk away with CAD 36 million, the timing of his departure proved fortuitous. Before the year came to a close, an Asian financial crisis took a major toll on oil stocks. They would not recover their losses until 2000. Because Turcotte produced strong results for investors, he had little trouble in raising funds for his next venture, Western Oil Sands. Bob Puchniak of the Winnipeg investment firm of James Richardson & Sons, a backer recruited by Turcotte, told Canadian Business, "We immediately fell in love with the oil sands project, but largely because of who was telling the story…. [Turcotte's] strongest suit is probably that he's never truly satisfied with what's on the table. He asks so many bloody questions and looks at so many alternatives that he seems to always maximize opportunities."

Turcotte prepared to make an initial public offering (IPO) of Western Oil Sands stock in January 2000, but at the time technology stocks were the darlings of the investment community, draining the market of available funds for other plays. Turcotte postponed the offering, instead engineering a $130 million private placement of stock. When the IPO was held in early 2001 the company received another $60 million. A major reason for the attraction of the Athabasca Oil Sands Project was the contribution BHP had made. A world-class mining company, BHP introduced a common gold mining technique called counter current decantation to develop a new highly efficient way to separate bitumen from sand through a washing process.

In December 1999 Western Oil Sands began construction on the project's two primary facilities, the Muskeg River Mine and Extraction Plant and the Scotford Upgrader. In addition, construction began on the Corridor Pipeline which was to transport the bitumen from the mine to the upgrader. Even as construction took place, the company began developing mine expansion plans and seeking regulatory approval. It also developed a marketing group that was touching base with potential customers for the crude oil the project would bring to the market.

As construction came to a close in 2002, Western Oil Sands built up its workforce and began making the orderly transition from construction to production. The first phase of the Athabasca Oil Sands Project came on-stream in 2003. Initial production was strong, and by continuing to make improvements, the Project was able to meet the design capacity of the facilities by the end of the year: 155,000 barrels per day. The partners looked to launch the next phase of the Project: mine expansion.

The Project benefited from high oil prices in 2004 and was able to take full advantage by making further improvements to production, which rose to 170,000 barrels of synthetic crude per day. Revenues grew from CAD 281.1 million in 2003 to CAD 636.9 million in 2004, resulting in net income of CAD 19.5 million. Once an afterthought on the world stage, Alberta's oil sands were attracting increasing investor attention for a number of reasons. Aside from the technological improvements that lowered production costs and made synthetic crude attractive during a time of rising oil prices, the resources were located in a stable part of the world, providing reliability. The same could not be said of Russia with its mercurial political environment, or the Middle East, unsettled more than ever by the war in Iraq. It was no surprise, therefore, that the price of Western Oil Sands stock increased fourfold in the four years after the company's IPO. In April 2004 the company placed another $68 million in stock.

KEY DATES

1954:: Shell Canada acquires oil sands lease in Alberta, Canada.
1996:: Shell Canada and Broken Hill Proprietary (BHP) begin pre-feasibility study on oil sands lease.
1999:: Former BHP employees form Western Oil Sands Inc., becoming Shell Canada's new partner.
2001:: Western Oil Sands goes public.
2003:: Athabasca Oil Sands begins production.

TURCOTTE RESIGNS AS CEO: 2005

In 2005 Turcotte stepped down as CEO and assumed the chairmanship, turning over day-to-day control to James Houck, a man with more than 35 years of experience in the energy business. Under his leadership, production continued to improve in 2005, with revenues reaching CAD 910.3 million and net income of nearly CAD 150 million. Expansion plans continued, part of a strategy to ramp up production to 500,000 to 600,000 barrels a day. Western Oil Sands also began looking for opportunities beyond oil sands. In 2006 the company reached an agreement with the Kurdistan regional government in northern Iraq to explore for oil and gas. Investors who bought Western Oil Sands stock because it was a predictable, low-risk venture, were not especially pleased with the news, however, bidding down the price of the company's stock. Should the modest investment pay off, however, it would help offset the high cost of oil sands development and production.

Ed Dinger